An Alternative Measure of Economic Slack to Forecast Core Inflation

Assessing macroeconomic demand conditions is critical for monetary policy to gaugeimminent inflationary pressures. Generally, measures of output gap, calculated byapplying statistical filters on GDP data, are used for this purpose. GDP data, however,are released only at quarterly frequency with a lag of approximately two months.This paper proposes an alternative indicator of economic slack that captures demandconditions efficiently and is also available at higher frequency. A macroeconomicdemand index constructed for this purpose using a rich set of high frequency (monthly)indicators emerges as a better predictor of core inflation than other measures